When you learn about blockchain technology, you may have come across a term that is often used in sentences related to crypto, namely Decentralized finance, better known as Defi. But some may still be confused about what Defi is. In this article, I will review the term Defi in crypto.
Recently, the Defi project has grown like mushrooms that grow in the rainy season. Like Defi on the Ethereum network, XRP, and so on.
This phenomenon is certainly very interesting because it may someday replace the traditional financial system which is currently still in progress.
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Defi Decentralized Finance explained
Defi is a system designed with the hope of providing open and transparent financial services to the general public. Interestingly, Defi offers the advantage that individuals and institutions can take advantage of wider access to financial applications without the need for third-party intermediaries. As a result, transfer costs are lower.
More specifically, Defi is an attempt to decentralize the use of traditional finance. Such as trade, loans, investment, wealth management, payments,, and insurance by adopting blockchain technology.
Defi aims to provide easy access to everyone who previously did not have access to banking or financial services. With the Defi system, will minimize the costs for everyone, even though has a low income, can take advantage of financial services more widely.
In other words, Decentralized Finance is an open-source, license-free and transparent financial service that is easily accessible to everyone. Operate without a centralized authority like a Bank. Users take full control of all their assets in the network ecosystem through peer-to-peer (P2P) decentralized applications (Dapps).
In the Defi system, the most important of all Defi protocols and applications is the “smart contract”. Smart contracts are small applications that store in a ledger and run by multiple computers in a distributed network.
Smart contracts provide a high level of security, which will guarantee deterministic execution and allow any status changes that are generated to be verified by anyone. It is highly transparent with minimal risk of manipulation and intervention.
The main layer of Defi
In the Defi system, it has 5 main layers to run Defi:
- The settlement layer. This layer contains the blockchain and its native protocols that allow the network to securely store proprietary information and ensure that any changes that occur comply with the rules set by the network.
- The asset layer. Is the layer that contains all tokens issued above the settlement layer. This layer includes native protocol assets, as well as additional tokens based on the blockchain, supported token standard.
- The protocol layer. The protocol layer has specific standards for use in decentralized exchanges, debt markets, derivatives, and on-chain asset management.
- The application layer. Is the lining to creating user-oriented applications that connect to individual protocols.
- The aggregation layer. This is the lining to creating a user-focused platform that is connected to multiple applications or protocols?
The layer grouping also facilitates the development of Defi so that it can develop financial products at the appropriate layer.
For what is Defi decentralized finance
Before understanding the benefits of this Defi system, I will invite you to take a flashback of the fintech that is commonly used today. The current financial infrastructure still adopts the traditional system known as Centralized Finance, abbreviated as CeFi, for example, central banks, commercial banks,, and financial asset exchanges have been accepted and used by all parties around the world.
Meanwhile, Defi is built based on DLT (Distributed Ledger Technology). Historically, the centralized financial system (CeFi) has had its ups and downs with many classic ‘flaws’ that have accompanied it. Additional transaction costs to intermediaries can add operational costs, complicated regulatory processes, and other aspects of financial services to impact users in general.
Security vulnerabilities that lead to fraud, data theft and financial crises are a series of negative sides of the traditional financial system (CeFi). PWC analysts reporting that around 45% of financial intermediary processes, such as money transfers and the stock market, are as a target by cybercrime every year.
Defi which offers a financial concept to solve the problems that often arise in the CeFi system. Some of the benefits of Defi are as described below:
Access is open to everyone
By the goal of developing Defi technology to provide access to people who previously did not have access to financial services.
According to the World Bank, 1.7 billion people in the world do not have bank accounts. People who do not have access to these financial services have no credit score. And this credit score is very important and sometimes uses to open a bank account or make a loan.
Defi allows people to easily access a wide variety of financial services.
Conversion access to other forms of assets
Defi provides an alternative for everyone to store their assets in another stable form. For example, we do not have to save funds in euros, but in the form of USDT (USD Tether) which is equivalent to US dollars.
Easy to Access
Not only Defi users can benefit from this technology, but many of the financial product creators are also starting to build the next generation on top of Defi. One of the main benefits of Defi is that most protocols, for example,, Ethereum is open source which means it can be accessed and used by anyone, for their personal projects.
Anyone with internet access can create Defi DApps. So that it is not only a financial service product open to its users but also to its owners.
At Defi, all information is easily available and can be accessed openly. This system believes that the lack of transparency can reduce one’s accountability and motivation to do things responsibly.
Low transaction fees
Defi can reduce transaction costs because there is no need for an intermediary in every service, of course,, this is different from traditional systems that use intermediaries.
Loan applications have become popular nowadays in the Defi system. Unlike traditional credit systems, lending and borrowing transactions on Defi will done instantly. Without credit checks and the potential for standardization in the future.
Monetary Banking Services
The Defi system includes the issuance of stablecoins, mortgages,, and insurance. The price of crypto assets is include into fluctuate very quickly. This is because smart contract technology can significantly minimize time and costs.
What is Defi application?
Defi Application is a software developed on the Defi platform which refers to application usage. Some of the Defi applications that have been developed are Lending, Dexes, Derivatives, Payment, and Asset.
Development companies make use of Defi, which is an open-source, to design financial service products.
Citing from defipulse, currently, there are 44 application Defi on the Ethereum network, from the first to the last are:
Uniswap, Maker, WBTC, Aave, Curve finance, synthetix, Harvest Finance, RenVM, yearn.finance, balancer, Sushiswap, InstaDapp, CREAM Finance, Flexa, Dforce, Nexus mutual, mStable, Dydx, Set protocol, Fortube, DODO, Loopring, Lightening Network, Bancor, Metronome, Kyber, Gnosis, xDai, DeversiFi, Erasure, PieDAO, DDEX, Opyn, Melon, MCDEX, RAY , Augur, bzx, ACO, Dharma, Opium network, Veil and Connext.
Based on data from DefiPulse, the cumulative valuation of crypto assets stored in the Defi sector reached the US $ 11.3 billion distributed across 44 Defi applications, from Uniswap to Connext. These developers compete with each other for a large number of users to increase performance and profit with a growing crypto asset.
What is Defi Dapps
Defi stands for Decentralized Finance, while Dapp stands for Decentralized application, thus it means that Defi Dapp is a decentralized application that runs on the Defi platform.
Dapp also has several characters as follows:
- Open Source – Application source code must be accessible to everyone.
- Decentralized – The Dapp must meet the requirements that all application operation records must be kept in a public and decentralized system.
- Incentivized – The application has a digital cryptocurrency to run by itself.
- Algorithm / Protocol – This algorithm was created to generate tokens and has a consensus mechanism that runs on the network.
The Dapp grouping itself is split into three, based on the Blockchain model used, DApps can be classified as follows:
- Type 1. This type of DApps has its own Blockchain system like Bitcoin and alternative coins.
- Type 2. This type of DApps uses Blockchain Type 1 and is a protocol that uses tokens to function. An example is the Omni Protocol.
- Type 3. This type of DApps uses the DApps type 2 protocol. An example is a SAFE network.
DApps works by implementing the four-character criteria mentioned above. Its mean DApps is a software platform that is open-source and implemented on a decentralized Blockchain system and runs using tokens that are generated using an algorithm/protocol.
Top Defi platform in Ethereum network
Based on Defipulse’s Defi ranking protocol, the following are the top five Defi platforms on the Ethereum network at press time:
Uniswap is an ERC-20 based token exchange protocol on the Ethereum network. Users can exchange ERC-20 based tokens quickly and without going through intermediaries, resulting in lower transaction fees.
Total liquidity when the press has reached more than 3 billion USD with daily volume reaching $ 198 million.
Maker DAO is a decentralized autonomous organization working on the Ethereum blockchain system. This Maker functions to minimize the level of volatility or changes in the value of DAI against the value of the United States dollar, where the MKR token holders have the power over the DAI stability fee.
A person borrowing DAI can use ETH as their collateral. The DAI value they will get is equivalent to the ETH value. Meanwhile, the ETH as collateral will be included in the CDP (Collateralized Debt Position).
Makerdao’s current total liquidity has reached 2.12 billion USD with ETH locked at 2.6 million ETH.
Wrapped Bitcoin or WBTC, which runs on the Ethereum network, the value of WBTC is always pegged at a ratio of 1: 1 to Bitcoin.This is an ERC20 token designed to increase Bitcoin’s massive liquidity using the Ethereum network.
WBTC itself at the time of the press was ranked 18th out of all existing crypto tokens, and has achieved a liquidity of 1.5 billion USD which has significantly increased from August to October this month.
The compound is a project on the Defi Ethereum network using an algorithmic money market protocol that allows users to earn interest or borrow assets.
This project has grown into a fairly popular Defi application with liquidity growth reaching 1 billion USD. With a certain mechanism, someone can borrow using ETH as collateral, or get earn by saving funds.
Aave is one of the Defi platforms on the Ethereum network which is engaged in decentralized lending. Dapps Lending is currently growing wherein Aave the lender uses the ERC-20 token which will then earn continuously. The steady increase has represented the number of tokens held by lenders.
Currently, Aave’s liquidity has reached 984 million USD, but periodically in October 2020, it has experienced a graph decline. Below rank may replace position platforms on the ranking.
The increased use of Defi on the Ethereum network contributed to Ethereum’s ranking on Coinmarketcap. This is such great support for ETH that it can still compete with Bitcoin for now.
With the growth of Dapps that can act as intermediaries between borrowers and borrowers, this can provide easy access for everyone to get loan funds.
However, one problem may arise if there is a coding error in the smart contract, because after all the Defi system uses a complicated algorithm so that one code error can cause the failure of the entire project function.
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